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Derivative Data, Proxy-Rule Reversal, Whirlpool: Compliance

Five European banks have a total of 4.8 billion euros ($6.8 billion) of derivatives contracts with the Italian government, according to data released for the first time by European regulators.

Deutsche Bank AG has the most with contracts valued at 1.78 billion euros, followed by BNP Paribas SA with 1.13 billion euros, Dexia with 777 million euros, UniCredit SpA with 661 million euros and Intesa Sanpaolo SA with 458 million euros, according to data from the European Banking Authority’s stress tests last week. Banks had 326 billion euros in all of such deals with Italian central and local governments, the EBA said.

The disclosures, required for the first time in this year’s stress tests, shed light on an aspect of government debt management that is subject to only limited disclosure. In 2001, Greece used off-market swaps with Goldman Sachs Group Inc. to conceal the true size of its borrowings. Repeated revisions of Greece’s figures, beginning in 2009, spurred a surge in borrowing costs that pushed the country to the brink of default and triggered a region-wide debt crisis.

The data also show indirect exposure through contracts with third parties, such as banks, that reference specific countries, indicating how banks were managing their exposure to countries through derivatives. Of the 2 trillion-euro total exposure to EU governments reported by the EBA, derivatives account for 263 billion euros. Most of the contracts have a maturity of one year or less. The longer-dated positions include debt management-related swaps with sovereign counterparties, and credit default swaps between banks that reference the sovereigns.

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EU’s Reding Proposes Freezing Order for Business-Debt Lawsuits

The European Union proposed a law allowing companies to freeze debtors’ assets using court orders from any EU jurisdiction, in a move that lawyers have said will raise bank costs and liabilities.

The proposal will help businesses recover as much as 600 million euros ($863 million) a year that’s now being written off to avoid costly cross-border lawsuits, EU Justice Commissioner Viviane Reding said today in a statement.

The EU’s legislative arm said last year that 63 percent of cross-border debt can’t be recovered because of a network of diverging national laws and the high cost of winning separate freezes in each country where assets are located. The European Parliament must approve the law before it’s implemented in the bloc’s 27 member countries.

Under the proposed law, debtors’ assets must be held by banks until national courts can issue orders in a claimant’s favor.

When the proposal was outlined in a paper last year, lawyers said it could trigger lawsuits against banks both by claimants and debtors alleging a freeze was implemented too slowly or without enough evidence.

Matthew Newman, a spokesman for Reding, said the proposal isn’t “reinventing the wheel,” because it’s only expanding on similar laws on the books in EU member countries.

U.S. FTC Chairman Endorses More Information Sharing With China

U.S. Federal Trade Commission Chairman Jon Leibowitz said he hopes to increase information sharing with Chinese government agencies in regard to cross-border mergers and acquisitions.

He made the remarks to reporters in Beijing today.

Leibowitz, who arrived in the Chinese capital yesterday, is in Beijing to sign a Memorandum of Understanding on Antitrust and Antimonopoly Cooperation between the U.S. Department of Justice and the FTC and the Chinese Ministry of Commerce, the National Development and Reform Commission and the State Administration for Industry & Commerce.

Compliance Action

Ex-Credit Suisse Offshore Banking Head Charged in Tax Case

Credit Suisse Group AG’s former head of North America offshore banking, Markus Walder, was among seven bankers charged with conspiring to help clients in the U.S. evade taxes through secret bank accounts.

The seven bankers and an eighth executive were charged July 22 in an amended indictment in federal court in Alexandria, Virginia. Four of the Credit Suisse bankers were previously charged. The new defendants include Walder, Susanne D. Ruegg Meier, a former Credit Suisse manager, and Andreas Bachmann, another former banker at the Zurich-based lender, Switzerland’s second largest.

The indictment increases pressure on Credit Suisse, which said July 15 that the Justice Department notified it that was a target of a criminal probe over former cross-border private banking services to U.S. customers. Walder and others helped U.S. customers evade income tax through accounts not declared to the IRS, according to the indictment. In the fall of 2008, the bank maintained thousands of secret accounts for U.S. customers with as much as $3 billion in assets, according to a Justice Department statement.

“Credit Suisse is committed to a fully compliant cross-border business,” the bank said in a statement July 22. “Subject to our Swiss legal obligations and throughout this process we will continue to cooperate with the U.S. authorities in an effort to resolve these matters.”

The case is U.S. v. Adami, 1:11-cr-00095, U.S. District Court, Eastern District of Virginia (Alexandria).

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SEC Watchdog Probes Agency’s Oversight of Stanford Receiver

The U.S. Securities and Exchange Commission’s internal watchdog is investigating the agency’s dealings with the man hired to recover funds for victims of R. Allen Stanford’s alleged fraud amid claims the court-appointed receiver has taken too much money for himself.

Inspector General H. David Kotz said July 22 he is reviewing the SEC’s oversight of the receiver, Ralph Janvey, after getting a complaint that the bulk of recovered funds has been used to cover legal bills.

Janvey was appointed in 2009 after the SEC sued Stanford and a federal grand jury indicted him on 21 criminal counts alleging that he used his Houston-based Stanford Financial Group and an Antigua-based banking unit to defraud clients through the sale of certificates of deposit. Stanford, who has denied the allegations, is being held without bail while awaiting trial.

Kachroo Legal Services P.C. of Cambridge, Massachusetts, released a statement July 22 accusing Janvey of “malfeasance and waste” in his management of collected assets and claiming there was an “inside deal” between Janvey and the Stanford investor committee to approve high fees.

Kevin Sadler, Janvey’s attorney, said that the allegations are “patently false and completely irresponsible.” Janvey, who hasn’t been contacted by Kotz, will respond “promptly and appropriately” to any request, Sadler said in a statement.

SEC spokesman Kevin Callahan declined to comment.

Whirlpool Sets Aside Up to $306 Million for EU Antitrust Probe

Whirlpool Corp., the world’s largest appliance maker, set aside as much as $306 million to cover a possible fine by European Union regulators probing price-fixing of refrigerator compressors.

Whirlpool said in a regulatory filing July 22 that “based on recent developments, a minimum loss amount can now be reasonably estimated” to cover defense costs and expenses tied to a European Commission investigation into its Embraco unit.

“We establish accruals only for those matters where we determine that a loss is probable and the amount of loss can be reasonably estimated,” the company, based in Benton Harbor, Michigan, said in the filing.

Under EU law, companies can be fined as much as 10 percent of annual sales for breaking antitrust rules. The commission has made fighting cartels a priority in recent years. EU investigators raided producers of refrigerator compressors in 2009.

Embraco last year paid $91.8 million to settle a similar U.S. Justice Department probe.

EU Approves Spanish Aid for Caja De Ahorros Del Mediterraneo

Caja de Ahorros del Mediterraneo obtained European Union approval for Spanish state aid, the European Commission said in a statement on its website today.

Caja de Ahorros del Mediterraneo, known as CAM, is a savings bank that attracts deposits and provides commercial banking services in Spain.

Earlier, CAM’s board approved making a request to the Bank of Spain for 2.8 billion euros ($4 billion) from the country’s rescue fund, FROB, as part of its recapitalization plan, according to a July 22 e-mailed statement by CAM.

India Panel Said to Advise Easing Limits on Wal-Mart, Tesco

Wal-Mart Stores Inc. and Carrefour SA may gain access to the retail market of the world’s second most-populous country after an Indian government panel was said to have recommended easing restrictions on the industry.

Overseas companies could be allowed to own as much as 51 percent of stores that sell more than one brand if they invest a minimum of $100 million, a panel of bureaucrats in New Delhi recommended on July 22, according to a finance ministry official. Pantaloon Retail Ltd., India’s largest listed store owner, rose to its highest level in more than six months in Mumbai today.

India currently allows overseas companies 51 percent ownership in retail shops selling only one brand and 100 percent in wholesale stores. The world’s two biggest retailers Wal-Mart and Carrefour, who already operate wholesale outlets in India, seek to sell in a market that Business Monitor International estimates will be worth $396 billion this year and may double to $785 billion in 2015.

The cabinet will make a decision after consultations are held, said the person, who had direct knowledge of the matter and declined to be identified before an announcement.

Wal-Mart may open hundreds of retail shops in the country if the rules are changed, Raj Jain, chief executive officer of its India venture, said last year.

Arti Singh, senior vice-president for corporate affairs for Wal-Mart’s India operations in New Delhi, declined to comment before seeing an official notice.

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Fake Apple Stores Ordered by Chinese City to Close After Probe

Chinese authorities shut two unauthorized Apple Inc. stores in Kunming for operating without business licenses, a newspaper run by the southwestern city’s government reported.

Investigators also examined three other stores that used Apple’s logo without the company’s permission, though they were found to have operating permits, according to the Dushi Shibao newspaper report posted today on the Kunming government’s website. The findings were part of a probe into more than 300 electronics vendors in the city, according to the report.

The move comes about a week after the “BirdAbroad” blog began posting photographs of a fake Apple store complete with an acrylic staircase and crew of blue-shirted sales staff, showing the extent some dealers will go to profit from booming demand for iPhones and iPads. The company’s network of more than 900 retail outlets has failed to keep up with demand, spurring customers to buy from vendors not sanctioned by Apple.

The city government hasn’t received any requests from Apple on the matter, and the company declined to comment on the findings, according to the report.

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U.S. Appeals Court Rejects SEC Proxy Access Regulations

A U.S. Securities and Exchange Commission rule making it easier for shareholders to oust board members was rejected by a federal appeals court.

The U.S. Court of Appeals in Washington July 22 agreed with the U.S. Chamber of Commerce and the Business Roundtable that the SEC failed to study the cost of fighting a challenge from shareholders.

The rule, which was mandated by the Dodd-Frank financial-regulatory overhaul enacted last year, would have allowed investors or shareholder groups that own at least 3 percent stock for three years to put their own board nominees on proxy statements.

“The commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters,” U.S. Circuit Judge Douglas Ginsburg wrote for the three-judge panel.

Some of the U.S. Securities and Exchange Commission’s Dodd-Frank rules may face legal challenges following the decision.

The SEC rule written last year was meant to open company boards to candidates pushed by major shareholders. The defeat comes as the SEC works on more than 100 rules it was assigned by the Dodd-Frank overhaul enacted a year ago.

Among federal regulators, the SEC faces the largest share of Dodd-Frank rule-writing. About 70 of the rules have been proposed so far, SEC Chairman Mary Schapiro told lawmakers at a hearing July 21. The law requires the agency to study each rule’s effect on “efficiency, competition and capital formation.”

The SEC declined to comment on whether Dodd-Frank rules are legally vulnerable. On the July 22 ruling, Kevin Callahan, an SEC spokesman, said the commission is “reviewing the decision and considering our options.”

The case is Business Roundtable v. Securities and Exchange Commission, 10-1305, U.S. Court of Appeals, District of Columbia (Washington).

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SEC Auction-Rate Comments May Aid Investors, Lawyer Says

Auction-rate securities holders seeking to win back part of the $330 billion they’ve invested, may get help from a U.S. Securities and Exchange Commission legal brief supporting claims that Merrill Lynch & Co. rigged the moribund market, a lawyer involved in the case said.

Jonathan Levine, a lawyer with Girard Gibbs in San Francisco, made the remarks in a telephone interview. His firm represents investors in the appeal.

Merrill Lynch, now part of Bank of America Corp., failed to adequately inform investors of its alleged role in “propping up” auctions, the SEC said in the brief, filed in the U.S. Court of Appeals for the Second Circuit in New York. If the court agrees with the SEC’s argument, it may lead to the reversal of other dismissed auction-rate cases alleging brokers and dealers rigged the market, Levine said. “Now it depends on whether the court accepts the view of the SEC.”

Lawsuits by the agency and state regulators led to the return of at least $60 billion to individual investors.

Bill Halldin, a Merrill spokesman, declined to comment.

Katrina Cavalli, a spokeswoman for the securities trade group, said that its brief “speaks for itself.”

The case is Colin Wilson v. Merrill Lynch & Co., Inc., et al., No. 10-1528, U.S. Court of Appeals for the Second Circuit, New York, New York.

For more, click here.

Pheim Asset, Tan Lose Bid to Overturn Singapore Stock Ruling

Tan Chong Koay and Pheim Asset Management Sdn, ordered to pay S$250,000 ($207,000) each in Singapore’s first civil lawsuit for market manipulation, failed in their bid to overturn the ruling.

The Monetary Authority of Singapore, which sued Tan and his asset manager Pheim, said the fund manager intended to create a “false and misleading appearance” in the city’s stock market by buying shares of United Envirotech Ltd. in the last three trading days of 2004.

The “pattern of trading was not consistent with either the actions of an investor who genuinely believed that UET shares were undervalued or those of a ‘contrarian’ investor,” a panel of three judges including Chief Justice Chan Sek Keong wrote in a 45-page ruling July 22.

Singapore’s central bank, which has tightened the rules for financial misconduct after the global credit crisis in 2008, has said it won’t tolerate “window dressing” and allow fund managers to think they can get away lightly.

Pheim and Tan denied the stock-rigging claims and said they wouldn’t have risked their livelihood and business. They had a “genuine commercial intent to buy the shares,” at issue in the market manipulation case, Vinodh Coomaraswamy, their lawyer had argued.

The Pheim Group, including its Singapore operations, manages about $1.8 billion.

The case is Tan Chong Koay v. Monetary Authority of Singapore, CA186/2010 in the Singapore Court of Appeal.

Editor: Fred Strasser

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